Rain now more valuable than Telkom

Telkom’s share price plummeted by 24% on Wednesday after MTN walked away from talks to buy the traditional fixed-line operator.

MTN said after extensive engagements, the discussions have terminated as the parties could not agree to their mutual satisfaction on the process going forward.

Telkom said MTN terminated discussions as it was not in a position to provide MTN with assurances about exclusivity.

“Discussions were at an early stage and had not progressed to due diligence, nor had a binding offer been received by the Telkom board,” it said.

The termination of discussions followed a proposal by Rain where it suggested that Telkom should buy it by issuing new shares.

Rain argued that such a merger would create a strong third player to compete with Vodacom and MTN’s duopoly.

It also presented the deal as a competition-friendly alternative to MTN buying Telkom.

Rain believes a compelling business case exists for combining the businesses, including removing infrastructure duplication, cutting capital expenditure (Capex), and creating a strong 5G player.

It added that it is well-positioned for growth, with little debt and sufficient facilities to fund its network rollout.

Telkom versus Rain

Rain is showing strong growth and achieved its budgeted R1 billion EBITDA (earnings before interest, taxes, depreciation, and amortization) for its fiscal year ending February 2022.

However, it has nowhere near the same scale and assets as Telkom.

Telkom’s EBITDA of R11.9 billion dwarfs that of Rain. It also has significant fibre assets, a large property and tower portfolio, and a strong IT presence in the business market through BCX.

Rain brings around 1 million subscribers, 7,500 4G base stations, and 1,500 5G base stations to the table.

Telkom, in comparison, boasts 16.9 million mobile subscribers, 1 million fixed-line subscribers, and 7,313 mobile sites.

Despite Telkom’s larger asset base, the latest share price decline means it is now worth less than Rain.

Telkom’s share price tanked by 24% on Wednesday, which saw its market cap drop to R17.5 billion.

In comparison, Rain’s valuation increased by 9.7% to R17.95 billion on the back of strong 4G and 5G sales, the successful spectrum auction, and additional investment.

Although it is challenging to justify that Rain is more valuable than Telkom, that is what the market is telling investors.

The table below gives a side-by-side comparison of Telkom and Rain and what they would offer in a merger.

Rain versus Telkom
Measure Rain Telkom
Market Cap/Valuation R18.0 billion R17.5 billion
EBITDA R1 billion R11.9 billion
Mobile Networks
Mobile customers 0.4 million* 16.9 million
Broadband Customers 0.6 million* 0.6 million
Mobile sites 9,000 7,313
Spectrum 174MHz 212MHz
Other Operations
Carrier-neutral data centres 0 10
Data centre co-location 0 2,914 racks
IT business customers 0 1,345
Productive tower portfolio 0 3,916 towers
Fibre network 0 169,000km
Homes passed with fibre 0 890,000
Fibre subscribers 0 414,847
Fibre to-the-base-stations 0 20,000
Enterprise business services 0 22,000
*Estimates based on Rain projections